The Euro has fallen from roughly 1.49 to the dollar to 1.43 in a mere two days, which is a huge move. Many pundits have argued that the ECB’s newly accommodative stance is the trigger, but there may be additional forces at work. Most experts have deemed the idea that any eurozone member would exit the currency to be simply inconceivable, that it would be too costly and disruptive. But with the hair shirt that Greece is being asked to wear, all bets may be off.

As of this juncture, this reports in Der Spiegel does not appear to have gotten traction among the Usual Suspects in the MSM. Headline: “Greece Considers Exit from Euro Zone” (hat tip readers John M and Illya F).

SPIEGEL ONLINE has obtained information from German government sources knowledgeable of the situation in Athens indicating that Papandreou’s government is considering abandoning the euro and reintroducing its own currency.

Alarmed by Athens’ intentions, the European Commission has called a crisis meeting in Luxembourg on Friday night…

Sources told SPIEGEL ONLINE that Schäuble intends to seek to prevent Greece from leaving the euro zone if at all possible. He will take with him to the meeting in Luxembourg an internal paper prepared by the experts at his ministry warning of the possible dire consequences if Athens were to drop the euro.

“It would lead to a considerable devaluation of the new (Greek) domestic currency against the euro,” the paper states. According to German Finance Ministry estimates, the currency could lose as much as 50 percent of its value, leading to a drastic increase in Greek national debt. Schäuble’s staff have calculated that Greece’s national deficit would rise to 200 percent of gross domestic product after such a devaluation. “A debt restructuring would be inevitable,” his experts warn in the paper. In other words: Greece would go bankrupt.

It remains unclear whether it would even be legally possible for Greece to depart from the euro zone. Legal experts believe it would also be necessary for the country to split from the European Union entirely in order to abandon the common currency. At the same time, it is questionable whether other members of the currency union would actually refuse to accept a unilateral exit from the euro zone by the government in Athens.

Yves here. So what will they do if Greece refuses to observe niceties and bolts anyhow? Send in tanks? I’m curious as to what punishments might be visited on Greece if it chooses to exit. Iceland had a very rocky six months when its banking system failed but it is now on track for a solid recovery. This example cannot have been lost on Greece. Back to the story:

What is certain….is that the measure would have a disastrous impact on the European economy.

“The currency conversion would lead to capital flight,” they write. And Greece might see itself as forced to implement controls on the transfer of capital to stop the flight of funds out of the country. “This could not be reconciled with the fundamental freedoms instilled in the European internal market,” the paper states. In addition, the country would also be cut off from capital markets for years to come.

Yves here. This “you’ll never borrow again” threat is greatly exaggerated. In fact, investors like borrowers who have cleaned up their balance sheets. That’s why Chapter 11 works. Argentina’s default and end of dollarization proved salutary, with the country now performing better on virtually every economic indicator than its Latin American peers. The big difference is that it did not have to recreate a stand-alone currency, which would be a huge operational hurdle for Greece. Back to the article:

In addition, the withdrawal of a country from the common currency union would “seriously damage faith in the functioning of the euro zone,” the document continues. International investors would be forced to consider the possibility that further euro-zone members could withdraw in the future. “That would lead to contagion in the euro zone,” the paper continues.

Moreover, should Athens turn its back on the common currency zone, it would have serious implications for the already wobbly banking sector, particularly in Greece itself. The change in currency “would consume the entire capital base of the banking system and the country’s banks would be abruptly insolvent.” Banks outside of Greece would suffer as well. “Credit institutions in Germany and elsewhere would be confronted with considerable losses on their outstanding debts,” the paper reads.

The European Central Bank (ECB) would also feel the effects. The Frankfurt-based institution would be forced to “write down a significant portion of its claims as irrecoverable.” In addition to its exposure to the banks, the ECB also owns large amounts of Greek state bonds, which it has purchased in recent months. Officials at the Finance Ministry estimate the total to be worth at least €40 billion ($58 billion) “Given its 27 percent share of ECB capital, Germany would bear the majority of the losses,” the paper reads.

The problem with some of this logic is that the Greek debt should already be written down severely. Most experts estimate losses in the range of 50% to 70%. So large losses exist but have not been recognized.

The interesting question is whether this threat by Greece is serious or mere posturing. We may find out sooner than many expect.

If Greece left I would immediately start planning a vacation there, assuming the exchange rate would heavily favor euro holders like me. And there might also be a boom for Greek agriculture because the prices in the EU for Greek exports can’t get much lower without disrupting their segments. I suspect they’ll stay about as high as they are now and the Greeks will party. I mean we now pay about 15 euros a kilo for organic Greek fish. I can’t imagine it dropping to 7.

Agreed. Furthermore, the ability to service debt is the ability to not borrow at all. When will governments realize this?

“If the Nation can issue a dollar bond it can issue a dollar bill. The element that makes the bond good makes the bill good also. The difference between the bond and the bill is that the bond lets the money broker collect twice the amount of the bond and an additional 20%. Whereas the currency, the honest sort provided by the Constitution pays
nobody but those who contribute in some useful way. It is absurd to say our Country can issue bonds and cannot issue currency. Both are promises to pay, but one fattens the usurer and the other helps the People.” Thomas Edison

Furthermore, Greece should legalize private currencies to tempt its black market into the open and to provide a healthy check and balance on government spending. Who needs the discipline of a foreign central bank when Greece’s own private sector could provide that needed check and balance?

That’s an ideal situation, but debt can be serviced if it’s re-financed under more realistic terms and conditions for the debt-holder. It may take longer, but doable in healthier terms for Greeks. But that’s not the banksters primary concerns. They’re concerned about servicing their own obligations without shrinking their reserves (if they have any).

A national bankruptcy in Greece would have a serious impact on Germany, where many banks have invested heavily in the high-yield Greek treasury bonds — after borrowing the money to buy the bonds from the European Central Bank (ECB) or other central banks at rates of 1-2 percent. Making money doesn’t get much easier — as long as the Greeks remain solvent.

A London investment banker is betting on the continued decline of prices for Greek bonds in the short term, while simultaneously waiting for the right time to start buying the securities again. He jokes: “If someone has €1,000 in debt, he has a problem. If someone has €10 million in debt, his bank has a problem. And the bank, in this case, is Europe.”

But it’s a testament to how insane this world has gone that no amount of common sense or empirical experience seems to convince the citizenry of any of these prey countries (except Iceland, yet they too have only had a half-hearted response) that the Euro was a scam which is not in the interest of anyone but the banksters of Germany and France.

There’s hysteria screaming, “Why would Greece do this?” But a rational person would ask, why didn’t they do it a long time ago? And they’re probably not serious about doing it now.

Greece has just as much autonomy the moment its people choose to exercise it. Same for any other country.

(Also, from what I read the people of Iceland still want to join the EU even after all that’s happened, so their defiance is in spite of that subsisting wish. They still haven’t purged neoliberalism; last I checked, after dumping one kleptocratic government they simply installed another set of criminals who still want to pay these nonexistent debts and impose austerity. So the Icelanders still have a lot of evolving to do as well.)

Iceland did not “borrow” AFAIK: some private Icelandic banks had business abroad that went awry. Iceland nationalized them to prevent the worst but the people rejected to pay excessive indemnities to foreign investors who lost what they risked.

Business is risk: it is gambling and you can’t expect to have your bets 100% safe. Sometimes you win and sometimes you lose, but some people are sore losers.

Icelander politicians have tried once and again to scam their own People into paying for the banksters but as the country is a true democracy and not just a parliamentarian pretense of such thing, they have rejected in referendum once and again to assume private debts into the public budget.

Maybe Ireland should have done the same. Maybe they could still do that: only a referendum and a some honest politicians are needed. Let the investors assume their risk and not transfer investment loses to the People, which is too much of a scam even for the most brutal form of Capitalism.

Yup, as if that “theory” ever even needed refutation. But there’s sure been plenty of it.

The ideology presumes people to be “rational” only where convenient for the elites. It tries to obscure all coercion by claiming that if you didn’t literally have a gun to your head when “choosing” to do something (e.g. obey an order from a boss to do something unsafe or illegal, to work unpaid off the clock, etc.), then you freely chose it as a rational actor, and the employer has no liability or exposure. That’s just one example.

It’s the same kind of scam (and from the same Chicago source) as the rentier-justifying “there’s no such thing as a free lunch” scam.

No, remember the German banks will be exposed as insolvent. Remember Japan? Huge savings rate, export powerhouse (even during its lost decade) and banks up to the gills with losses. The German banks are in the same fix, but everyone pretends not, and bizarrely that is working for the moment. Japan could maintain the illusion of bank solvency via its own extend and pretend, but I don’t see how you can do that when you have actual defaults, as would occur here.

Japan kept its currency weak through the 1990s and much of the 2000s to assure its export sector was strong. You’d expect a rump Eurozone to want to do the same.

Fair enough, the banks will be in quite a spot. Would they have to print money to wind them down or bail them out, thus devaluing the currency — or would a cruddy banking sector devalue currency some other way?

My feeling is that the loans were made deliberately ignoring principles of prudential lending precisely in order to put the weaker members of the EU into compromising positions. As long as Germany doesn’t overplay its hand and force an exit from the monetary union, it will strengthen its control over the other member states. I’m sure they have precisely calculated at what point it makes rational sense to abandon the debts, and will steer clear of overstepping these bounds.

Yves, it is 7 pm central and I have just read the guardian and telegraph updates. they are not as hysterical as derSpiegel account but both reporters say or nearly say that Greece has reached the end of its Franco-German rope. Tellingly the French finance minister is completely silent. She is eloquent and forthright so the situation must be “in extremis.” Maybe Sir Fred has a bold plan of action. Maybe. Maybe the silver market will soar to 60 dollars an ounce on Monday. Time for the real world to reassert its dominion over these Financial wizards and wunderkind.

I would point out that it may not be coincidence at all that silver prices plunged more than 35% this week, crude oil prices nearly 20%, and in the last two days of the week, the EU lost roughly 4%.

This domino effect from silver, to crude, to the EU did not happen in a vacuum. Curbing Silver speculation could well be the warning signal that all is not well at all in the EU region.

The EU is almost certainly destined to be split into a core EU (good sovereigns) and peripheral EU (Bad PIIGS)

Bets have been covered and taken off in the past week. Is it just coincidence Greece may be preparing for default this weekend? Or perhaps the big financial institutions knew this all along, and are getting positioned/hedged for this eventuality.

Remember, none of what is happening in all the financial markets is happening in a vacuum, idiosyncratic and walled off from the rest. Though this is precisely what the powers that be want you to believe, that every incident is an incident unto itself, with no relation to any thing else happening in the financial markets.

Yes, it is in fact so inter-related and with so many variables that I’m relatively confident that no one has a good hold on it or has any reliable predictive powers or models.

This comment dovetails nicely into my Broken Clock Theory. People notice when they are right and disregard (or explain away) when they’re wrong. The few times reality happens to conform to their misbegotten predictions is just happenstance, but it works to embolden their idiocy.

If they (any nation or entity for that matter) takes such a casual approach towards repayment of their debt as you imply, Such entity would and should get treated as a financial pariah. The ongoing financial cost implication of that are a form of punishment don’t you agree?

Not at all: never a nation, the People, should be punished for the private business of bankers, corrupt politicians and businessmen.

Whoever lent the money anyhow, assumed the risk. It is banks who must pay for undue credit, not the People. After all it’s banks’ profit and banks’ risk, never the People’s.

Actually the Greek People should nationalize everything and then declare bankruptcy. It does not matter at all if you are treated as a “financial pariah” (they are already being treated that way anyhow) but to know for real how much you have (industries, hotels, banks, etc.) and how much you can get to produce benefits for the people.

But maybe I’m talking a language you don’t understand, a language in which private property, if it has to exist at all, is only for the good of the majority not for private hoarding and bloodsucking.

I’m talking in democratic language in which the economy is to be managed by the People and not the other way around.

I do understand – just do not agree. I think what you suggest is is a paradigm shift that I am not certain is attainable in this time space continuum.
In this reality the language you use has similarity to that used by the Marxists and believe that experiment was tried and is a bigger con game.

I do not suggest anyone be bailed out – banks, countries people etc. I see the fact that Iceland, Ireland et al nationalized private debt but then that was also in effect an attempt to “build confidence”. They called wrong in the shell game and that gets no brownie points.
Enforcement of contracts has to start somewhere – I suggest without delay. Tough that they are holding the parcel but really that jurisdiction (nation state, collective people or however you aggregate them) allowed the banks to run amok beyond their ability to bail out.
So if these entities now embark on brinkmanship I think they may find they don’t have what it takes to back up the bluster.

There’s no “paradigm shift”, it all depends in which paradigm your mind is: most European constitutions, at least formally, put private property way under other rights like housing, a dignified job, etc.

For me, the paradigm shift is the Reaganist idea that human rights are under property “rights” (privileges) and that “greed is good” (for whom?). I grew up in the 1980s but never really assimilated such ideas.

So for me it’s people like you who are trying to change the paradigm from one in which the purpose of any society (polity, economy) is to serve the people into one in which the people is to serve the bourgeois oligarchies.

I have not changed my paradigm: you are the one who tries to change basic human values that surely root into Paleolithic, basic stuff like solidarity and such, you know.

“Enforcement of contracts has to star somewhere”. Sure. The “social contract” (constitution) of my state (Spain, bad luck) says that I (or any other citizen) have a right to a dignified job: enforce that. It says that I have a right to a home: enforce that too. It says that private property is secondary to social needs: enforce that, please, because social needs are growing with 20% unemployment!

Money, property and all the economy exist only for one reason: to satisfy the needs of the People, society, the community. If they do not serve that purpose, they must be intervened or even suppressed altogether.

Debt is just an aspect of money and one that should not exist because it allows private actors such as banks to create money out of thin air (thanks to fractional reserve or no-reserve legal requirements).

Whatever the case there is a right, enshrined even in the US constitution, to bankruptcy. And when you go bankrupt, your debts are forfeit.

Altering this right to bankruptcy, as it’s happening for instance with the newest Spanish laws, which keep you in debt even after bankruptcy, is changing the paradigm… in favor of bankers and other such usury practitioners.

It’s in the end restoring the Medieval feudal concept of usury and bonded servitude and that is a major change in paradigm. One that will of course spark resistance.

I forget the author but over at forexlive (a fx news site) someone put it quite nicely in the comments section: ez should keep Greece and use it as a currency intervention tool. whenever eur getting too high, just bring up Greek debt issue and it’s free.

A comment on Iceland. It’s not on track for a solid recovery. Measured in currencies other than the Iceland krona their economy is in a deep hole and they still owe the UK and Holland a huge pile of money which they will eventually have to pay off if they ever want to join the EU (which, apparently, they do). The banks will continue to be a major drag on Iceland’s economy. Don’t forget that they went through a spectacular bubble just like the US. The only difference is that Iceland hit rock bottom sooner and is now stabilizing, but calling it a solid recovery is a stretch.

They owe nothing: there’s no international mechanism that can enforce that unilaterally claimed “debt”. Besides it’s not the business of the People of Iceland to save the arses of Icesavers: they should have known better.

This does not exclude the possibility of bringing Icesave managers to court and get them in jail (that would be a novelty!) but that’s unlikely to get your precious “savers” their money back – they should have known better anyhow.

Surrendering your sovereignty to an unelected board heavily weighted by the big guns of continental europe is a pretty dumb idea I think Greece and other PIIGS will get on board with the idea of leaving. Currency devaluation is the historical and normal way of fixing these problems and w/o that ability, nothing gets fixed.

The thing is I could actually see the Euro rallying strengthening big time if the PIIGS get out. The EUR is actually cheap relative to the big guns like Germany that drive it. Germany has benefited hugely from what is even now a “cheap” currency relative to where the Deutschmark would have been. So if the PIIGS get out, it will only lead to a strengthening EUR given it’s just France and Germany and then the eastern european countries clamoring to get in (as well as those that are now there).

“An article published today concerning the possible exit of Greece from the Eurozone is not only completely untrue…”

This seems credible –

“SPIEGEL ONLINE has obtained information from German government sources knowledgeable of the situation in Athens indicating that Papandreou’s government is considering abandoning the euro and reintroducing its own currency.”

If Greece does get some concessions you can bet your bottom euro that Ireland and Portugal will be right behind seeking same.There may well be a race to the bottom for the best deal.
Here in Ireland sentiment toward the EU has gone decidely negative.The ordinary citizen here and I suspect in Greece also will not mourn the passing of the euro and the EU itself.
Its amazing how nationalism is emerging in unexpected ways.
For instance Germany and France have been pressing Ireland to give up its low corporation tax rate in exchange for a better interest rate on the reparations package we have to pay.
The fact is only the EU commission can decide this and Ireland has veto power anyway.But what most people have noticed is that German national interest is steamrolling over whatever power resides with the commission.

At least ,as Yves has noted there are no tanks that can roll into Athens et al.Had we been further down the political road the nascent EU army would have had the power to invade Greece or Ireland .
Hopefully the EU will disintegrate quickly and we can all move on with the lives we want to live .

Given what you have said, hypothetically, why wouldn’t every Spanish household that has Euro Deposits in Santander simply withdraw their money and deposit it with a German-based bank in Madrid? By doing so, even if Spain were to withdraw from the Euro and convert all Euro deposits in Spanish banks at a government-decreed exchange rate, the Euro deposits in German banks would still be Euros.

“By doing so, even if Spain were to withdraw from the Euro and convert all Euro deposits in Spanish banks at a government-decreed exchange rate, the Euro deposits in German banks would still be Euros.”

Not true. The German bank with branches in Spain will obey the Spanish govt.law and convert the deposits.

There are no such families anymore. No money: in euros or anything else. That’s the real tragedy of the Europe of the markets: that the markets have vanished because income has vanished.

Anyhow, I remain persuaded that it is much more likely that Germany leaves the euro than Spain or any other low tier country does. Why would they? Only being kicked off that could happen and EU does not have real power to kick any state off the euro (much less considering the issue would require unanimity).

What the periphery states under pressure from qualification agencies, IMF, etc. can and will do is to remain in the euro even after bankruptcy (AFAIK there’s no euro-rule that forbids bankruptcy or renegotiation of the debt: they just forbade inflation when they made the rules, and then failed to enforce that single rule the first very quarter because it would have meant to fine Germany and France and that’s a no-no).

Germany might decide to go off the euro if this one keeps falling (for some odd reason they prefer a too strong currency) but, while that might harm the euro somewhat, it would have Germany the most by depriving it from markets. So no.

Essentially the only solution is a joint one: it is to devalue the euro until it approaches parity with dollar (and therefore the rest of the Universe) and that’s good. We don’t need (nor can support) an “international reserve currency” we need a dynamic economy that can create jobs.

It would so rational for Greece, Ireland and Portugal to exit. And Yves is correct, Iceland is the precedent. This would allow the taxpaying public to write off the debt. This would be seriously bad for the German and French banks.

However, even though completely rational, will it happen? If Greece has to pull this threat out to convince the banks to take their well deserved haircut it could be closer to happening than most believe.

Ireland’s Last Stand began less shambolically than you might expect. The IMF, which believes that lenders should pay for their stupidity before it has to reach into its pocket, presented the Irish with a plan to haircut €30 billion of unguaranteed bonds by two-thirds on average. Lenihan was overjoyed, according to a source who was there, telling the IMF team: “You are Ireland’s salvation.”

The deal was torpedoed from an unexpected direction. At a conference call with the G7 finance ministers, the haircut was vetoed by US treasury secretary Timothy Geithner who, as his payment of $13 billion from government-owned AIG to Goldman Sachs showed, believes that bankers take priority over taxpayers. The only one to speak up for the Irish was UK chancellor George Osborne, but Geithner, as always, got his way. An instructive, if painful, lesson in the extent of US soft power, and in who our friends really are.

Spiegel: most alarmist. There is a secret meeting and the agenda is Greece leaving.
FAZ: there is a secret meeting and the agenda is how to convince Greece to reform to get the next tranche of IMF money in June. EU and are Greek gov are denying any thoughts of leaving the currency union.
Stern: EU says nothing to see here.
SZ: Germany, France, Finland, Holland and Trichet are meeting in Luxemburg without Juncker. Discussion on all crisis countries and IMF deadline. Spain, Belgium and Slowakia know nothing.

So, it sounds like there is a meeting of the countries that are able to pay and countries unable to contribute have not been invited/informed. The exact agenda is not quite clear. But IMF and lack of reform progress keep being mentioned. Overall it looks like the political EU is splitting. Independent of the exact agenda this is quite remarkable.

Good point about Argentina – it has defaulted multiple times over the past 100 years. Now the country wants to tap credit markets again if they can clean up the holdouts from the last restructuring. I’m sure they would find plenty of lenders, too.

Reminds me of what a guy who sold junk bonds once said – “it’s the easiest job in the world… all you have to say is, but it yields 10%”. Of course, most junk yields much less than that now!

1. Greece leaves the Euro and defaults. German taxpayers bail out German banks.
2. Greece defaults and stays in Euro. German taxpayers bail out German banks.
3. Greece doesn’t default and stays in Euro. German taxpayers pay down Greek debt to bail out German banks.

That’s it really. #3 appears to be the least likely and least desirable – Germans won’t like it because they’ll think they’re helping Greeks rather than their own banks.

I’d say go for #1, that’s good for Greece and Germans will at least have a clear choice of whether or not to engage in a US-style bleeding the economy to save the banks.

But the most likely option is probably #2. If Greece defaults and stays in Euro, it’s probably the highest cost to Greeks, but might be the lowest cost to Germans, since restructuring terms might be better than otherwise.

Oh, and all the talk about Greece having to leave the EU as well as the Eurozone is IMHO just scaremongering. Britain wasn’t expelled from EU when it didn’t join the Euro, and neither will Greece be expelled if it leaves the Euro. EU is a good idea, and will survive, unlike the Euro in its present form.

Friends;
Could we be seeing the opening ‘salvo’ in a European power struggle analogous to Americas War Between the States? That one was pretty much all about whose ‘elites’ would exercise paramount control within the union. Agreed, America didn’t have several distinct languages to contend with, but the underlying dynamics I would suggest are the same. Europe is at present in a loose confederation. We are seeing the start of a move towards a tighter federal system. Given these dynamics, we should go back and reread our Bismark. Hoch der Euro!

A fall of the euro is good news for Europeans, that it’s just of two cents in two days is bad news: it must fall c. 40% and reach parity with the dollar if the euro and the EU are to survive. You can’t have the strongest currency globally when your political institutions are so weak.

At this rhythm it’d take 43 days for that to happen. And that would be great news for European exporters and, mind you, consumers as well (less consumption but more LOCAL consumption, which is generally of better quality and mostly non-radioactive).

“So what will they do if Greece refuses to observe niceties and bolts anyhow? Send in tanks? I’m curious as to what punishments might be visited on Greece if it chooses to exit.”

European ‘politics’, I’m afraid. The EU is dominated by elitist lawyers.

And… well… how should I describe this…

Okay, you ever sat down for a drink with a smug lawyer? You bring up a topic — any topic — that you might have been thinking/reading about that day. You can be sure that while you’re trying to have a discussion the lawyer will chime in with some irrelevant article in some irrelevant treaty and then give you a shit-eating grin as if to say, “I know something fundamental about this issue that you don’t.”

Well, 99.9% of the time the article turns out to be nonsense (just think back to the whole ‘no-bailout clause’ BS that took place around the time of the Eurocrisis). But that’s not why people bring these articles up. They just bring them up so that they can sound informed and interesting when they’re yapping in a bar somewhere.

Ditto for the ‘illegality’ of Greece leaving the Eurozone. It’s just the talk of some snob, no-nothing group of EU lawyers that filtered down through the press like toxic rainwater.

Oh, incidentally — Morgan Kelly is absolutely hated by anyone with any power in Irish society. He’s one of the most reviled personalities on the Irish scene — great economist though.

Oh, and just to highlight what Morgan Kelly is actually advocating for Ireland:

“So the second strand of national survival is to bring the Government budget immediately into balance.”

I say he’s a great economist only insofar as he’s willing to stand up to the complete BS that the Irish media generally run with. I should have said that he’s a ‘great commentator’, because, in truth, he’s a terrible economist.

There is no way on this planet that the Irish government can bring the budget back into balance in the current environment. Any cuts in spending will feed into tax-revenue streams via the unemployment rate within months.

Euro = Artificial Franco/German construct to negate the chance of France being invaded again and ditch the strong Mark which would by now have been the strongest currency on the planet – BMW anyone? Soon as one of the PIIGS defaults and returns to monopoly currency the others will follow and the Euro will shoot to $2.00-$2.20. For those of you trading EUR I would humbly suggest you go longer than John Holmes’ esteemed member. I am not giving investment advice, merely proffering an opinion based on a lifetime of scepticism and distrust of those that would seek to govern us.